The Practical Guide to Loan Processing

The Practical Guide to

Loan Processing

Copyright 2021

By Thomas A. Morgan

The Practical Guide to Processing ? 2021 QuickStart Publications

2021 Printing

ISBN 9781089950646

"The Practical Guide to Loan Processing"

? 2021 ¨C Thomas Morgan, QuickStart Publications

ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system,

or transmitted by any means, electronic, mechanical, photocopying, recording, or otherwise, without

the prior written permission of the publisher and the copyright holder.

This publication is designed to present, as simply and accurately as possible, general information on

the subject. It should be noted that the information presented is not all-inclusive. Products, programs

and guidelines change due to rapid changes in the industry. This publication should not be used as a

substitute for referring to appropriate experts and is sold with the understanding that the publisher is

not engaged in rendering legal, accounting, or other personalized professional service. If legal or other

expert assistance is required, the services of a competent professional should be sought.

The Practical Guide to Processing ? 2021 QuickStart? Publications

Table of Contents

TABLE OF CONTENTS ................................................................................................................................ I

Introduction ................................................................................................................................................... 1

CHAPTER 1 ¨C THE PROCESSOR¡¯S DUTIES & RESPONSIBILITIES ...................................................... 3

JOB DESCRIPTION - MORTGAGE LOAN PROCESSOR ............................................................................. 3

Specific Duties .................................................................................................................... 3

General Description of Duties ............................................................................................. 4

The Career Path of the Processor ...................................................................................... 4

The Division of Duties between Processor and Loan Officer ............................................. 4

General Time Frames for Application Process ................................................................... 5

Process Flow....................................................................................................................... 7

CHAPTER 2 - MORTGAGE INDUSTRY OVERVIEW ................................................................................. 9

The Mortgage Broker Business ........................................................................................ 10

Retail Lending ................................................................................................................... 11

Interest Rate Drivers ......................................................................................................... 13

BASIC MORTGAGE MATH .................................................................................................................. 13

Loan-To-Value or ¡°LTV¡± .................................................................................................... 14

Qualifying Ratios ............................................................................................................... 14

Pre-Qualification and Pre-Approval .................................................................................. 15

Calculating Payments and Interest - Simple Interest ........................................................ 15

Principal and Interest ........................................................................................................ 15

PITI ¨C The Components .................................................................................................... 16

LOAN PRODUCTS.............................................................................................................................. 16

Fixed Rate Products.......................................................................................................... 16

Temporary and Permanent Buydowns ............................................................................. 16

UNDERSTANDING ADJUSTABLE RATE MORTGAGES (ARMS) ............................................................... 17

2nd Mortgages.................................................................................................................... 18

Reverse Mortgages ........................................................................................................... 18

Prepayment Penalties ....................................................................................................... 19

UNDERSTANDING LOAN PLAN SPECIFICATIONS AND GUIDELINES ........................................................ 20

Major Program Guidelines - Conforming .......................................................................... 21

Automated Underwriting and Qualifying Ratios ................................................................ 22

Private Mortgage Insurance (PMI) .................................................................................... 22

Non-Qualified Mortgage Loans ......................................................................................... 23

Federal Housing Administration (FHA) Loans .................................................................. 24

FHA Loan Amount Calculation.......................................................................................... 24

FHA Mortgage Insurance ¨C MIP ....................................................................................... 24

Department of Veteran¡¯s Affairs (VA)................................................................................ 24

CHAPTER 3 - NEW LOAN SETUP, VENDORS AND DISCLOSURES .................................................... 26

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The Practical Guide to Processing ? 2021 QuickStart Publications

The Importance of a Thorough Loan File Setup ......................................................................................... 26

SOURCES OF APPLICATIONS AND TREATMENT ................................................................................... 26

New Retail Application ...................................................................................................... 26

Internet Loan Application/Lead ......................................................................................... 27

Assigned/Transferred Applications ................................................................................... 28

Brokered/Wholesale .......................................................................................................... 28

Transferred Files ............................................................................................................... 28

Loan File Set-Up Procedures - Set Up Checklist.............................................................. 29

Entering the Loan in the Loan Log .................................................................................... 29

ELECTRONIC FILE MANAGEMENT VS. PAPER FILES............................................................................. 30

Electronic File Management ............................................................................................. 30

Paper File Management .................................................................................................... 30

ORDERING THE CREDIT REPORT ....................................................................................................... 32

Loan Officer/Originator/AE May Order Report .................................................................. 32

In-File, Pre-Qual or Tri-Merge vs. Full RMCR .................................................................. 32

Credit Report Order Methodology ..................................................................................... 33

Full Mortgage Credit Report .............................................................................................. 33

Alternative Credit Report ................................................................................................... 33

Business Credit Report ..................................................................................................... 34

Adverse Summary............................................................................................................. 34

ASSIGNED FILES ............................................................................................................................... 34

APPRAISAL ORDER ........................................................................................................................... 35

Appraisal Checklist............................................................................................................ 35

Approved Vendors ¨C Appraisers ....................................................................................... 35

Appraisal Order Issues ..................................................................................................... 35

Condominium/PUD Questionnaire .................................................................................... 36

Condominium/PUD Checklist............................................................................................ 36

Ordering FHA Case Numbers and Appraisals .................................................................. 36

VA Online Ordering ........................................................................................................... 36

Condominiums and Government Insured Loans .............................................................. 36

Disclosure Desk Procedures ....................................................................................................................... 37

TRID ¨C TILA RESPA INTEGRATED DISCLOSURE ............................................................................... 37

LE/GFE APPLICATION DISCLOSURES ¨C CLOSING COST ESTIMATES .................................................... 37

Overview ........................................................................................................................... 37

Issuing Initial Cost Estimates ............................................................................................ 37

How to Count ¡°Business Days¡± ......................................................................................... 38

2-14-11Loan Estimate and Closing Disclosure Timing Procedure ................................... 39

TRID - PRE-QUALIFICATION, PRE-APPROVAL AND APPLICATION ......................................................... 40

Application Paths and Requirements ................................................................................ 40

Application (Closed End) Processes................................................................................. 40

LOAN ESTIMATE STEP-BY-STEP APPLICATION PROCEDURE ................................................................ 42

TRID - Transaction Type - Know Before you Owe OR GFE 2010 ................................... 44

At Application ¨C ARM Disclosure ...................................................................................... 44

Home Equity Lines and Open-Ended Credit ..................................................................... 45

When Your Home is on the Line ....................................................................................... 45

Notice of Right to Cancel (Right to Rescind) .................................................................... 45

The Nature of ¡°Disclosures¡± .............................................................................................. 45

HANDLING MISSING DOCUMENTATION ............................................................................................... 46

Using the LOS to Capture and Request Missing Documentation..................................... 46

Using the LOS Data Export or Report Feature to Request Missing Documentation. ....... 47

Using the ¡°Items Needed ¨C Notice of Incomplete Application¡± to Request Missing

Documents ........................................................................................................................ 49

THE WELCOME PACKAGE - BORROWER INTRODUCTION ..................................................................... 50

Welcome Package Checklist ............................................................................................ 50

DIRECT VERIFICATIONS..................................................................................................................... 51

Direct Verification Checklist .............................................................................................. 51

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The Practical Guide to Processing ? 2021 QuickStart Publications

FILE ORDER ..................................................................................................................................... 52

Electronic Files - The case for ALWAYS using Exhibit/Document Naming Conventions. 52

Sample Listing of File Names assigned to Various Documents ....................................... 53

Stacking ¨C Paper Files ...................................................................................................... 54

CHAPTER 4 - DOCUMENTATION REVIEW ¨C REVIEWING CREDIT AND PAYMENT HISTORY ......... 55

CREDIT BUREAUS VS. CREDIT REPOSITORIES .................................................................................... 55

Reading the Credit Report ................................................................................................ 55

Understanding the Ratings - What is "Bad" ...................................................................... 57

Credit Report Types and Variations .................................................................................. 58

Credit Reports on Assigned Files ..................................................................................... 58

COMPONENTS OF THE HOUSING AND EXPENSE RATIOS ...................................................................... 59

The Housing Expense Ratio ............................................................................................. 59

Playing with Principal ........................................................................................................ 59

Adjusting Other Components of the Front Ratio ............................................................... 60

The Total Debt Ratio ......................................................................................................... 61

What is a Debt?................................................................................................................. 61

Tactics for Handling High Card Payments ........................................................................ 62

Co-signed Loans ............................................................................................................... 63

Installment Loans MAY be Excluded ................................................................................ 63

Regular Business Expenses/Self Employed Borrowers ................................................... 65

CREDIT HISTORY .............................................................................................................................. 66

UNDERSTANDING CREDIT SCORING ................................................................................................... 67

Credit Verification ¨C Liability, Mortgage or Rental Verifications ........................................ 68

Credit Explanations ........................................................................................................... 69

Ways to Improve Credit .................................................................................................... 70

Fraud Alerts....................................................................................................................... 71

CHAPTER 5 - DOCUMENTATION REVIEW - INCOME DOCUMENTATION .......................................... 73

INCOME COMPUTATION ..................................................................................................................... 73

Calculating Base Income .................................................................................................. 73

Documentation Review ¨C Paystubs .................................................................................. 73

Questionable Paystubs ..................................................................................................... 75

Reviewing Documentation ¨C W-2¡¯s ................................................................................... 76

Income Computation ......................................................................................................... 77

"Stable" Income................................................................................................................. 77

Base Income with Enhancements -25%! .......................................................................... 77

Getting the most of Overtime, Bonus, & Commissions..................................................... 78

Bonus, Tips and Commission ........................................................................................... 78

Future Raises .................................................................................................................... 79

Verification of Employment/Income .................................................................................. 80

SELF-EMPLOYMENT .......................................................................................................................... 81

Who is Self-Employed? ..................................................................................................... 82

Treatment of Self-Employment Income. ........................................................................... 83

Start with the Personal Returns ........................................................................................ 83

Income Sources and "Addbacks"...................................................................................... 84

Partnership and S Corporation Tax Returns and Income Analysis .................................. 84

Analyzing the US Corporation Income Tax Return ........................................................... 84

The Profit and Loss Statement ......................................................................................... 85

The Balance Sheet............................................................................................................ 86

SELF-EMPLOYMENT ANALYSIS TOOLS ............................................................................................... 87

Simple Analysis ................................................................................................................. 87

Self-Employed Income Analysis ¨C Cash Flow Analysis Method ....................................... 87

Self-Employed Income Analysis ¨C Entity Return Analysis ................................................ 89

Income ¡°Red Flags¡±........................................................................................................... 90

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